Toys 'R' Us Looks Like a Bad Deal

Mar. 1.11 | About: Toys "R" (TOYS)

KKR, Bain Capital and Vornado Realty Trust (NYSE:VNO) led a leveraged buyout of Toys "R" Us (TOYS) for $6.6 billion plus assumption of debt in March 2005. Toys "R" Us is apparently preparing for an IPO in 2011.

Summary: IPO buyer beware; this looks like a bad deal for investors.

Looking at Toys "R" Us’s October 30, 2010 10K, we see the following:

Balance sheet: A small negative net worth of $3 million, supporting $5.4 billion in debt. Only $272 million in cash on hand. Private equity investors obviously drained the Toys "R" Us balance sheet by paying over-the-top dividends to themselves

Income statement for the nine months ended October 30, 2010 shows:

  • An anemic 2.3% growth in sales.
  • An operating loss of $35 million, down from an operating profit of $95 million a year earlier.
  • A nine-month loss of $162 million up 160% from a year earlier loss of $75 million.
  • A 25% increase in interest expense to $403 million from $323 million.

Cash flow shows:

  • Cash used in operating activities increased 54% to $1.2 billion from $804 million.
  • Cash provided by financing activities increased 157% to $608 million from $236 million.

Conculsion: Unless the Toys "R" Us fourth quarter is a positive blow-out, the company may have to defer its IPO plans ... or the private equity firms will have to take a big hit to their buy-in valuation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.